Friday, November 14, 2008

ANOTHER BAILOUT for Mortgageholders: The FDIC's Version

As we posted the other day, the Federal Housing Finance Administration has a mortgage modification program for troubled borrowers from the extremely troubled Fannie Mae and Freddie Mac (each posted gigantic losses this week. Again.). In that post, we also mentioned that Citi, Bank of America, and JPMorgan Chase also have programs in place.

But the Federal Deposit Insurance Corporation, the entity which oversees old-fashioned banks' deposit accounts for up to $250K, has another plan.

FDIC head honcho Sheila Bair is, frankly, tired of taking over banks each week. And the fact is, the FDIC is going to run out of money doing this.

The FDIC needs $24 Billion for this plan; Comrade Paulson et al over at the 4th Branch of US Government, Treasury, don't want this cash to come from the $750 Billion, since they have other plans.

The FDIC proposal justifies itself this way:

"Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow (around 4 percent of seriously delinquent loans each month). It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures."

This is the basic structure, and is intended for mortgageholders whose loans are NOT with Fannie or Freddie:


"This proposal is designed to promote wider adoption of such a systematic loan modification program:"

*by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and

*sharing up to 50% of losses incurred if a modified loan should subsequently re-default


This is the program in numbers:



Read the FDIC's proposal here.

THERE'S A PERSISTENT IDEA among the mortgage mod advocates that saving legitimately troubled debtors--plus those who were greedy (too much house), irresponsible, stupid, or taken advantage of--will somehow stop the freefall of housing prices and thereby rescue the US economy.

Some fine minds beg to differ. More on this in a future post.

1 comment:

Anonymous said...

Mo Mod, yes I believe this is the answer, we need sound valuation principles before any program is launched. This will benefit the Taxpayer along with the troubled homeowner because it will set the start of stabilization of property values. Why continue to lose value of your home when foreclosures keep mounting, it is going to take time to correct itself, remember real estate average appreciation is 3-4% per year in good times, not 15-25% per year. With getting the market stabilized we could start seeing appreciation of property agin, but it will take 2-3 years before that starts. With no action, it will continue to drop, who knows were the bottom is? Mo Mod is the answer!